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The Weekly Rap! Friday June 7th, 2013

The bond market’s month-long plunge has pushed long-term interest rates on mortgages and Treasurys to their highest levels in more than a year. The Dow last traded at 15,213. The S&P 500 is trading at 1,6392. Gold is trading higher at $1,383 an ounce, while oil futures at $96.23 a barrel. Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $3.73/Gal.

Yields on 10-year Treasury notes, which move inversely to prices, last traded at 2.15%. 30-year Treasury Bond yields last traded at 3.31%. Rates on 30-year fixed-rate mortgages stayed a hair above 4% this week. Just a month ago, they were below 3.5%. Since May 8th Fannie Mae MBS (Mortgage Backed Security) with 3% coupons has fallen nearly 4 points to their lowest levels in a year. MBS yields are interest rates at which banks sell their loans into Fannie Mae and Freddie Mac bond programs. Rising yields mean higher consumer-mortgage rates.

The FNMA 30-year fixed 3.0% coupon, containing 3.25-3.625% mortgages, pretty much the benchmark or how rate sheets are priced these days is currently trading at 100.28, right where they were a week ago. Basically each percent change in the price of the security translates to the price (or points paid or credited) of the mortgage rate. The higher the number (price), the better the rate.

In economic news this week; The big news of the week is the employment report this morning. The Fed’s stimulus has been a boon to financial markets, so traders have been on edge since Mr. Bernanke’s comments. Today’s report appears to have eased concern among stock investors that the central bank would soon pull back on stimulus as the Dow jumped 1.2% to reclaim the 15000 level.

U.S. employers added 175,000 jobs in May, maintaining the slow but steady gains of recent months and easing worries about a summer slowdown in the U.S. economy. The May payroll increase was in line with the average job gain of 172,000 over the past 12 months. The unemployment rate rose slightly to 7.6% in May from 7.5% in April, as more people entered the workforce, the Labor Department reported this morning. A broader measure of unemployment that includes discouraged workers and those forced to work part time was 13.8%.

The report likely keeps the Fed Gods on their current monetary-policy path as they contemplate pulling back on its on their $85-billion-a-month bond-buying program later this year. Fed Chairman Ben Bernanke said last month that the central bank could start slowing its bond purchases at one of its “next few meetings” if the economy continues to improve. Has anyone bothered to ask where the Fed is getting the $$$ to be purchasing 85 BILLION of bonds each month???

Construction spending rose a scant 0.4% in April. Nonresidential construction spending, which includes projects such as health-care facilities, rose 0.7%, while residential construction spending fell 0.2%. Supported by growing demand and low inventory, home prices continued to run ahead in April, with year-over-year growth hit the fastest pace in more than seven years. Including short sales and other distressed properties, home prices in April grew 3.2% during the month and were up 12.1% from the same period last year.

Businesses in the U.S. weren’t as productive in first quarter as originally believed and worker pay posted the biggest drop since 1947, as companies sought to avoid the full effect of a big tax increase that took effect in January. The growth in productivity from January to March was taken down a few pegs to 0.5% from 0.7%, according to newly revised figures from the Labor Department. Adjusted for inflation, hourly wages sank 5.2% in the first quarter.

Apparently there is little evidence that cutbacks in federal government spending were slowing down the economy. The Beige Book data (because the report is printed on beige paper, seriously), with the report of steady growth may be one reason that Bernanke has suggested the central bank could reduce the pace of its bond-buying program in a “few” meetings, subject to the economic data.

The report said that manufacturing continued to expand in most districts. One area of some concern could be consumer spending. Instead, the so-called Beige Book released by the Fed, covering the period from early April to late May, said the economy maintained the “modest to moderate” pace that has been in place so far this year. The report showed that seven of the 12 districts reported only ”slight’ sales growth. Three reported modest or moderate gains. New York reported sales were tepid and Richmond said sales were flat. Residential housing and construction activity was either moderate or strong across the country. Reports about the labor market seemed more upbeat, with hiring “at a measured pace” in several districts and some contacts reporting difficulty in finding qualified workers.

Now here’s what really worries me: Since January 2009 the average growth rate in the economy has been at or below 2.0%. The Dow has gone from 9,000 to 15,000 a 66% gain in the same time period. Historically, from 1947 until 2013, the United States GDP Growth Rate averaged 3.2 Percent. First Q GDP is estimated to be 2.4%. Does this really warrant a stock market breaking all-time highs? I begged the question earlier; has anyone bothered to ask where the Fed is getting the $$$ to be purchasing 85 BILLION of bonds each month? If the Fed is attempting to slow their purchases of Billions each month in bonds, my guess is that it’s not because the economy is growing, it’s because they can’t continue to do it forever. As we continue to print more $$$ the value of our currency will drop causing further problems.

The US can’t continue to run this way forever. The more debt we incur (trillions each year) the more of each revenue dollar gets eaten up. Just try running up your credit cards and see what happens. This is a house of cards that could so easily fall. As soon as the stock market realizes this it will correct, and when it does retirement and saving assets drop, consumers spend less, companies’ tighten, layoffs ensue and you have another recession or worse. I’m not trying to be a gloom-sayer here, but am I the only one who sees this. The US national Debt is almost 17 TRILLION and climbing with no signs of stopping. The Fed has been trying to control something we call “free markets” in our capitalistic system, and this can only be “controlled” for some time and eventually it will return to its natural state. Maybe this is a good thing. We’ve had our rose colored glasses on for some time now and eventually they will either fall off or be ripped off. But it probably will be the latter.

If you know anyone who can benefit from my services, please call me. My greatest goal is to see clients and friends happy. I guess that’s why I love providing mortgage financing. It’s an immediate gratification when you can help someone purchase a home, or lower their payment on their existing home.